Interactive 'Financial Label' Helps Make Smarter Investment Choices

Most Americans see reduced standards of living when retiring because
they don't save effectively, due to uninformed decisions.

Every day millions of people think about their retirement plans. They have choices to go online to study the offerings at retirement fund websites. Research shows, however, that they often choose high fee options,
underinvest or don't invest at all because they don't understand the
performance estimates, risks, recommendations, fee structures, and other
disclosures that funds provide.

To address this issue, Junius Gunaratne, a doctoral student, and
Oded Nov, an associate professor in the Department of Technology
Management and Innovation at the NYU Tandon School of Engineering,
created the first online, interactive "nutrition label" for financial
products that, like the ubiquitous information nutrition panels on food
and packaged goods, is simple, easy to read and uncluttered. What's
more, the financial label is interactive, allowing people to easily get a
sense of the long-term implications of choices they make today.

‘The first online, interactive "nutrition label" for financial products allows people to easily get a sense of the long-term implications of choices they make today.’

Their first tests revealed that non-expert investors
significantly improved their ability to reach simulated retirement
savings goals. The study also revealed that novices who invested using
the interactive labels were far more likely to invest in low-fee funds -
a strategy that is widely advised because of the potentially large
positive effects of compound interest.

Nov and Gunaratne tested variants
of their interactive financial labels with 450 test subjects in a
retirement simulation experiment, in which the subjects were given
$10,000 per simulation year and asked to save $1.5 million over 35
years, distributed among 10 stock, bond, and cash funds.

The participant pool was divided into four groups: those who
received "nutrition label" fund information pages requiring
interactivity; those who received the same information in static form;
those who received pages in which interactivity was optional; and a
control group who received financial information in a format currently
used by leading investment firms.

"The impetus for taking the nutrition label approach is the need
to help people make sense quickly and effortlessly, taking into account
future implications of possible actions they make now," said Gunaratne.

"Unlike food labeling, however, we added the ability to check out
different choices and their impacts. Interactivity enabled users to
learn about the attributes of funds much like repeated decision-making
over time helps people better understand risk and reward," said Nov. The
information label borrows layout, print size, organization,
justification, typography, information design and line spacing from
nutritional labels.

Gunaratne and Nov found that interactivity increased
understanding and improved decision-making. Those who used the
interactive version of the financial nutrition labels (whether by choice
or because of the researchers' requirement) were 54% more likely to
reach their goal than those in the control group.

"Our motivation is really to build something that is easy for
people to understand - that they can engage with and make personal so
they can achieve long-term benefits," said Nov. "This is critical
because research has shown that consumers don't save in effective ways,
and leave a lot of money on the table."

Gunaratne added that individual investors are paying too much and
getting too little, "Which is why the U.S. has a serious problem of
underfunded retirement accounts."

The findings hold policy implications: "As demonstrated in our
research, interactive financial product information labels can help
consumers make better and more informed decisions," the authors wrote.
"Regulators should therefore consider mandating the use of interactive
information labels for financial products, just as simpler labels are
used in other contexts such as food and other consumer products."

"Using Interactive "Nutrition Labels" for Financial Products to
Assist Decision Making Under Uncertainty," was recently accepted for
publication in the Journal of the Association for Information Science and Technology.

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